You plan to take a business trip to Europe and want to convert $2,000 to Euros.

Question

You plan to take a business trip to Europe and want to convert $2,000 to Euros. The U.S. bank quote for the Euro is $1.3853-1.3888, meaning the bank will buy Euros at $1.3853 and sell Euros at $1.3888. (a) Calculate the amount of Euros you will receive from the U.S. bank. (b) On your trip, you complete all of your business in Europe and therefore use none of your Euros. When you return to the U.S., you want to change your Euros back to dollars. You note the bank’s quote for Euros is unchanged at $1.3853-1.3888. Calculate the amount of dollars you will get back. (c) How much have you paid for the two currency conversions? (d) Calculate the percentage spread using the following formula: (Ask rate-Bid rate)/Ask rate=% Bid/Ask Spread

Explanation / Answer

(a)

The amount of euros will be received from U,S.Bank = dollar.Euros = 2,000/1.3888 = 1,440.092 Euros

(b)

Amount will be getting back in dollars = 1,440.92 euros * 1.3853 dollars = $ 1,994.9597

(c)

Loss amount will be $ 5,0403 ($2,000-$1,994.9597)

(d)

The percentage spread using the following formula: (Ask rate – Bid rate)/ Ask rate = % Bid/Ask Spread.

%Bid/Ask Spread=(1.3888-1.3853)/1.3888=0.2520%

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